Why Bond Yields May Continue to Fall

The 10-year Treasury could be headed much lower. Here's why.

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Back in July I wrote a piece called Why Bond Yields May Be Headed Lower Short-Term, and it has played out just as I suspected. Bond yields moved toward the top target noted on the chart below, and in my prior post, as the highest level I suspect rates to move in 2013. And, sure enough, 2.98 was the high.

The following is from the article mentioned above:

"If we do break above 2.72, I think a move between 2.84-3.02 would put in a new incremental high, which I believe will be the top for at least couple of months following a test of those levels."

Moving forward, where does the 10-year go from here? I believe that we may be headed much lower; my first downside target is 2.39-2.43 on the 10-year. I would be shocked if we get back down toward 2.05-2.10 at any point in the near future unless there is some news event that roils the global financial markets.

Let's first take a look at the Commitment of Traders data to see where the major players are positioning themselves in the 10-year Treasury market. The commercials (i.e., the smart money) continue to buy bonds at a rapid rate relative to the large/small speculators.

Something else to consider is this government shutdown; it could be a reason a bond rally takes place.

Lastly, on a monthly chart, the six-period monthly RSI is very oversold and at levels we have not seen since 2006 (which was a major bottom). The monthly candlestick also seems to be forming a major bullish hammer as well. This hints at a rise in bond yields over the near-term. But we will need to see follow-through.

Click to enlarge
Chart source: TDAmeritrade

This article by Korey Bauer was originally published on See It Market.